World credit crunch could bite harder, warn experts

A trio of the world's leading financial and economic analysts yesterday sounded a grim warning about the effects of the global "credit crunch".

Band of England deputy governor Sir John Gieve, former U.S. Federal Reserve chief Alan Greenspan and the Organisation for Economic Cooperation and Development all said that financial markets are deteriorating as the lending squeeze continues to bite.

Sir John, who is responsible for UK financial stability, signalled he is increasingly worried that the credit crunch could have dire effects on the British economy, while Mr Greenspan said "progress has come to a halt".

The blizzard of warnings came as shares in the stricken bank Northern Rock plunged 14 per cent to 84.8p.

The woes in the mortgage sector helped push the FTSE 100 index of blue-chip firms down 155.6 points to 6070.9, its lowest closing level in three months.

At 10.45 this morning the FTSE-100 index was struggling and was down 25 points to 6045.9.

Northern Rock has now lost more than 93 per cent of its value in the past year.

Yesterday's slump came as the bank revealed it had received takeover proposals valuing its shares "materially below" their market price.

The Government is trying to finalise a shortlist of potential bidders within days.

It is desperate to offload the Rock and its massive taxpayer liabilities as quickly as possible.

But the deepening pain in the credit markets will make it even harder for Chancellor Alistair Darling to find an acceptable offer for Northern Rock.

Record defaults on U.S. mortgages could spark at least £100billion of losses in the financial industry, forcing banks to hoard their own cash rather than lending it to others to fund takeover deals.

Minutes released by the Bank yesterday showed Sir John Gieve voted for an urgent cut in interest rates earlier this month, but was overruled by the majority of his colleagues on the Monetary Policy Committee.

Members voted 7-2 to leave rates at 5.75 per cent, with Governor Mervyn King among those who opposed a cut.

The minutes recorded Sir John as saying that "waiting for further evidence before cutting interest rates towards a more neutral level risked making the slowdown sharper and longer than it needed to be to bring inflation back to target.

"Moreover, with the continuing turmoil in financial markets and the consequent tightening of credit conditions, the balance of risks to growth was to the downside."

The extent of Sir John's pessimism surprised economists, who pointed out he has never voted for a rate reduction since joining the Bank of England at the beginning of 2006.

His fears about the market malaise were echoed by the OECD, which released a grim analysis of the prospects for the world economy.

The highly-respected Paris-based watchdog warned world stock markets could be on the brink of a major collapse because of the crisis sparked by a meltdown in America's mortgage market.

It said: "Thus far, equity investors seem to have shrugged off the negative sentiment that prevailed over the summer, but it may be too soon to draw firm conclusions.

"As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn."

On Wall Street, traders also fled from shares following alarming comments from Mr Greenspan. The influential economist said hopes that financial conditions have started to improve are badly misguided.

"Progress has come to a halt" in recent weeks, he told an audience of business leaders in Toronto.

The stresses on Britain's banking industry were highlighted by a jump in the rates at which they lend to each other.

The cost of three-month loans rose to 6.52 per cent from 6.49 per cent on Tuesday, the highest level since September 19.

This could have knock-on effects for British families, because it will prompt lenders to ratchet up the interest rates on credit cards, overdrafts and mortgages.

Rising oil prices, which reached $99.29 a barrel in the U.S. yesterday, will add to the pressures on cash-strapped households.

• Bradford and Bingley have asked us to point out that they have not had problems borrowing the ready cash needed to offer buy-to-let and other loans. In fact, last month the bank raised £2.5billion in the money markets, as correctly reported in yesterday's City pages.